Once upon a time (before the time of computer-based loan documents) asset-based lenders utilized a pre-printed 4-page Security Agreement (Accounts Receivable) and similar documents to immortalize their agreements with their borrowers. These agreements were printed on a single 11×17 piece of paper with a cover page (titled Security Agreement (Accounts Receivable) and identification of the parties), 2 pages of terms and conditions (in 20 or so paragraphs) and page 4 – the critical last page after the fold, the Guaranty.
These pre-word processing agreements were rarely negotiated except for a rare change typed in the margin by iteration with an asterisk to note the place of the change.
Life was simple and, unlike today, lawyers were not making a living negotiating ABL loan agreements.
Page 4 remained the critical document, conveniently hidden on the last page and containing critical waivers that protected the lender should the borrower or its principal do the wrong thing.
As a practitioner in the twenty-first century I enjoy making a living when borrowers attempt to negotiate the most mundane terms of a Loan and Security Agreement. I am skilled at finding a middle ground protecting my lending clients while accommodating a language issue raised by borrower’s counsel who is demonstrating his worth to his borrower client.
But when it comes to negotiating terms of a Guaranty, I am reminded of my mentor when I was cutting my teeth as an ABL lawyer, who said to a borrower trying to negotiate a guaranty: “Do you want to borrow my money? Are you going to pay it back? Then just sign the agreement.”
A recent decision out of the Superior Court of Pennsylvania, is indicative of the power of the personal guaranty.
Borrower obtained a loan from Lender, which was secured by a note giving Lender a lien and security interest in Borrower’s asset (i.e., the collateral for the loan). In pertinent part, the Lender’s note provided that Borrower would pay the outstanding balance and interest by a certain date or a default would occur under the note.
The Borrower’s principal gave a guaranty, which provided (in part):
For good and valuable consideration, Guarantor absolutely and unconditionally guarantees full and punctual payment and satisfaction of Guarantor’s Share of the Indebtedness of Borrower to Lender, and the performance and discharge of all Borrower’s obligations under the Note and the Related Documents. This is a guaranty of payment and performance and not of collection, so Lender can enforce this Guaranty against Guarantor even when Lender has not exhausted Lenders remedies against anyone else obligated to pay the Indebtedness or against any collateral securing the Indebtedness, this Guaranty or any other guaranty of the Indebtedness. Guarantor will make any payments to Lender or its order, on demand, in legal tender of the United States of America, in same-day funds, without set-off or deduction or counterclaim, and will otherwise perform Borrowers obligations under the Note and Related Documents.
The guaranty also specifically stated that the:
Guarantor also waives any and all rights or defenses based on suretyship or impairment of collateral…. [and the guarantor also] waives and agrees not to assert or claim at any time any deductions to the amount guaranteed under this Guaranty for any claim of setoff, counterclaim, counter demand, recoupment or similar right, whether such claim, demand or right may be asserted by the Borrower, the Guarantor, or both
These very standard guaranty provisions should never be overlooked or negotiated away.
We will save you the gory details of this case other than to point out that the guarantors claimed that the guaranty and the related agreements were against public policy. The Court ruled:
Public policy is more than a vague goal which may be used to circumvent the plain meaning of a statute. …
Public policy is to be ascertained by reference to the laws and legal precedents and not from general considerations of supposed public interest. As the term “public policy” is vague, there must be found definite indications in the law of the sovereignty to justify the invalidation of a contract as contrary to that policy. Only dominant public policy would justify such action. In the absence of a plain indication of that policy through long governmental practice or statutory enactments, or of violations of obvious ethical or moral standards, the Court should not assume to declare contracts contrary to public policy. The courts must be content to await legislative action.
It is only when a given policy is so obviously for or against the public health, safety, morals or welfare that there is a virtual unanimity of opinion in regard to it, that a court may constitute itself the voice of the community in so declaring. There must be a positive, well-defined, universal public sentiment, deeply integrated in the customs and beliefs of the people and in their conviction of what is just and right and in the interests of the public weal. Only in the clearest cases, therefore, may a court make an alleged public policy the basis of judicial decision.
The court declined to follow the guarantors’ suggestion recognizing that UCC section 3-605 explicitly permits a separate agreement of a party to waive the defense of impairment of collateral.
Appellants signed separate agreements—the guaranties—explicitly waiving “any and all rights or defenses based on suretyship or impairment of collateral….. [Guarantors] have not argued they are not parties. Accordingly, after construing the plain language of the statute, as we must, …because [Guarantors] signed separate agreements providing for waiver, section 3605 does not permit [Guarantors] recourse. [citing UCC -3605(i)(2)].
[Guarantors] however, argue that their waiver—notwithstanding the language of section 3605—violates the … UCC’s anti-waiver provisions. ….[Guarantors], however, have not presented any argument addressing the present version of Article 9 and any pertinent anti-waiver provisions. Absent any such argument, it would be inappropriate for us to adopt the[ir] reasoning …
Bottom line is that the guaranties were upheld and the Lender was entitled to recovery.
Always keep in mind the value of a personal guaranty. Whenever a borrower protests the terms of a guaranty I am reminded of the wisdom of my client-mentors when I was cutting my teeth as an ABL lawyer, “Do you want to borrow my money? Are you going to pay it back? Then just sign the agreement.”
In these times of extraordinary competition and the need to employ funds are you willing to ignore that sound advice?
- Michael Hartley and S. Kent Hartley v. Stephen J. Hynes, Douglas J. Hynes, Leslie A. Hynes and Midlantic Erectors, Inc. (October 19, 2018) 2018 WL 5093975